Five Things That Make Healthcare So Expensive

Five Things That Make Healthcare So Expensive

It’s no secret that healthcare is expensive in the United States. Our almost $3 trillion of health spending comprises more than one-sixth of the nation’s GDP and, despite a recent slowdown, shows no signs of curbing in the foreseeable future. By 2023, $1 out of every $5 in the United States will be spent on healthcare. That’s an astounding prediction, supported in part by two trends: the aging of the population and the swarms of new patients who have health insurance coverage for the first time under the Affordable Care Act. But that is the future – what has driven the enormous healthcare cost growth that put us in an unsustainable place today?

The Fee-for-Service Payment System

Imagine if you sent your car for repair to a mechanic who hides his price list, makes unlimited repairs on your car that you don’t understand, and charges you for each service/repair after the fact. You have no idea if all of this work was necessary, let alone whether your car will run better now, but you are stuck with the bill. The mechanic down the street might have done half the amount of work and actually fixed your car, but he would only be paid half as much as the one who did all the unnecessary work.

That’s how our healthcare system has worked, in some form or another, for decades – if not for centuries. Doctors and hospitals have been paid based on the number of tests and procedures they run, regardless of the actual “value” which can be measured in terms of “bang for the buck” or in the desirability of outcomes from that care. In other words, the healthcare system has incentives to provide more care, and perhaps unnecessary care, because it will be paid more. While some new government programs under Medicare and Medicaid are trying to pay healthcare providers based on “value,” most of a doctor’s paycheck is still based on volume. That reality is unlikely to change in the near future.

Duplicative, Unnecessary and Fragmented Care

Imagine you let every member of your household loose in a grocery store to purchase food for the next week. There is no central shopping list – each person decides to buy food that he or she wants so that it will be available at home that week. 30 minutes later, you end up with five boxes of cereal, 35 bananas, enough chicken for three dinner parties, more bread than you can fit in the freezer, and enough cooking oil to support your ailing car engine.

That’s what happens every day in our healthcare system. Patients will often see different doctors across different facilities in different health systems. Over the course of a year, the same patient might be referred to three different specialists, visit two different urgent care centers and an ED in the next state while on vacations, have an inpatient stay at the local public hospital, and visit an independent ambulatory surgical center (ASC) for a small procedure. Those nine different points of contact with the healthcare system might not even know about each other – a different version of the patient’s medical record might exist in different databases across the nation. That lack of coordination can cause doctors, who are well-intentioned, to run duplicative tests when the results are already available from a different provider who ran the same test.

While each instance of this poor coordination might not be so expensive, imagine the combined effect as thousands of patients experience this sort of system on a daily basis. Estimates indicate that $150-$250 billion per year is wasted on uncoordinated care – surveys have found that up to 42 percent of patients receive duplicative, unnecessary, or “too much” care.

Death by Bureaucracy: Administrative Burdens

The healthcare system is not just about medical care: behind the doctors and nurses we see on television shows, there is a vast world of hospital administrators, insurance companies, medical billing and claims specialists, drug and device sales representatives, and more. Everyone who is involved with the organization and administration of healthcare adds to the non-medical cost of care for patients.

Insurance companies have a term for the amount spent on administration instead of healthcare: “medical loss ratio.” These percentages can get as high as 15 to 20 percent for private insurance companies, meaning that about $1 out of $5 of a health insurance premium does not go directly to funding medical care.

Of course, some amount of administrative expense is necessary. But how much of that cost could we do without? What could be redirected to improving the quality and safety of care?

Rapidly Advancing Technology and Treatments

We can do amazing things these days. You might have read about proton beam therapy machines that treat cancer and cost well beyond $100 million, or the $84,000 set of pills that virtually cure Hepatitis C. In some cases, the effectiveness of these treatments is in question and in others the enormous value is clear – in either scenario, though, we have to make tough decisions about who gets covered for what kind of treatment.

So far, we have taken the approach that everyone who needs an available treatment should get it, no matter the cost. How do we rationalize that ideal with the reality of skyrocketing healthcare costs? As our knowledge of diseases and their cures evolves, especially with precision therapies tailored to a patient’s genetic predisposition, advances in technology will continue to pose costly and difficult decisions about how to use our scarce health resources.

Insurance Design and Lack of Accountability

Think of the last time you were confronted with a healthcare decision. Perhaps it was whether to undergo a preventive screening or whether to undergo invasive surgery to remove all chance of a small cancer from developing. These sorts of things are usually covered by insurance because we think they are of good value. Because of that, though, cost probably never entered your mind in a significant way. Would your decision-making change if insurance did not cover that service or if it required you to share half the cost?

Health insurance is designed to shield us from the cost of avoiding or treating medical problems. That’s a very good thing. However, it also removes most of the barrier to getting care that might not be as necessary or valuable. We elect to receive the service anyway because it doesn’t cost much money. Small, marginal decisions like these can add up to a huge expense. If you combine this fifth reason with the first reason, you can see how both doctors and patients – who are the main decision-makers for care – have an incentive to receive more and more care, regardless of the value of that care. People are not to blame here – it is the unaccountable healthcare system that makes such behavior rational, understandable and acceptable.

What’s Being Done to Slow Down Costs?

Politicians and policy makers have not been asleep at the wheel – healthcare costs are analyzed and discussed all the time. Many have suggested that high-deductible health plans, funded with consumers’ personal health savings accounts (HSAs) make people more conscious of the cost of care. That heightened awareness might make people think twice before using unnecessary care. Critics have pointed out that, for people with limited financial security, the “consumer directed” health plans can leave people underinsured and unable to receive care they actually need.

The Center for Medicare & Medicaid Services (CMS), which is part of the federal government’s health agency, is conducting broad experiments to change the way healthcare is delivered and paid for. The most prominent initiatives include accountable care organizations (ACOs), patient-centered medical homes (PCMHs), and bundled payments.

Given how vast and well-established our healthcare system has become, we are likely to always have the issues described in this article. There is no magical solution. However, we must make progress to “bend the cost curve” before healthcare consumes our GDP and prevents us from investing more in education, defense, social security, and other programs that are just as vital to the health of our nation.

NOTE: The views expressed here are those of the authors and do not necessarily represent or reflect the views of Healthcare, Inc. and HealthCare.com.

Imran is a contributing writer for HealthCare.com and has covered healthcare topics for The Atlantic, the Wharton Public Policy Initiative, and the Leonard Davis Institute of Health Economics. He is a research assistant at the University of Pennsylvania examining health economics, with a focus on health policy research and quality/safety improvement.

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